Unit 2 - 2 Flashcards
How is APC calculated?
Comsumption/income
If APC = 1 = 100% income spent
What is MPC?
Marginal propensity to consume
The proportion in any rise in income that consumers would spend on consumption
How is MPC calculated?
Increase in consumption/increase in income
What is meant by the multiplier?
Injections into the circular flow of income are multiplied through the economy as people receive a share of the income and then spend most of what they receive
What is a closed economy?
NO IMPORTS OR EXPORTS
What is an open economy?
IMPORTS AND EXPORTS
How is the multiplier calculated?
1/MPS OR 1/(1-MPC)
Why is the multiplier important?
- A rise in any injection into the circular flow will increase the NI by more than what was injected
- A fall in any injection will decrease the NI by more than just the decrease in the injection
- An increase in a withdrawal will have a negative multiplier effect
TRADE CYCLE DIAGRAM
BOOM
RECOVERY
SLUMP
RECESSION
What are the characteristics of a slump?
- Firms going out of business
2. High level of unemployment
What are the characteristics of a recession?
- 2 successive quarters of negative growth
- Incomes and outputs decrease
- Businesses face decreasing demand
- Firms may have to lay off workers
What are the characteristics of a recovery?
- Firms invest more
- Incomes and output is rising
- Consumers increase their spending
- Unemployment is decreasing
What are the characteristics of a boom?
- Consumer spending and investments are high
- Increased levels of demand as disposable incomes rise
- Profits are high for most firms
- Low unemployment leads to higher wages and rising inflation
What are examples of fiscal policies?
TAX AND GOVERNMENT SPENDING
What are examples of monetary policies?
INTEREST RATES
What do monetarists believe?
They believe that the main determinant of NI is supply, they believe that supply creates demand
What is APC?
Average prosperity to consume
